A quarter of British nurseries made a loss last year and the average salary of childminders was just £7,600, yet parents in the UK pay more for childcare than most of their European counterparts, according to a government report.

The cost of childcare is rising faster than household incomes and now accounts for more than 25% of the average family's net income. Yet a report from Michael Gove's Department for Education has revealed that the sector is poorly funded and poorly paid, with some childminders complaining they were providing "the role of a teacher, but on a minimum wage".

Almost two-thirds (63%) of group-based childcare providers made a profit or surplus over the past year. One in 10 (11%) broke even, and about a quarter (24%) made a loss. Yet six out of 10 of the childcare providers who made any profit earned less than £10,000 a year, and the average salary drawn by owners was £13,500. Almost a third drew no salary and more than half took less than £20,000.

The report found that childminders who look after children in a domestic setting earned an average annual income of just £7,600, despite working four to five days a week. More than half (60%) had felt forced by the economic climate to freeze their fees for the past two years.

Insufficient demand for places and parents not being able to afford fees were found to be the greatest concerns and factors that kept childminders' incomes down. Nurseries, meanwhile, said that insufficient demand plus staffing costs, despite the low wages, were to blame for their lack of profitability.

Currently, British childminders can only look after three children at a time, including their own. The ratio is one to four in France and one to five in Germany and the Netherlands, a model endorsed by Truss, who is believed to have the ear of the Treasury.

However, Ryan Shorthouse, a researcher from the Social Market Foundation (SMF), said another issue was that nurseries and childminders could not rely on demand because their client base was restricted to a relatively small area and parents were struggling to find the cash to pay fees.

The SMF has proposed a national childcare loan scheme in which parents earning more than £12,000 a year could request a lump sum to be repaid monthly through the tax system over an extended period and at a low interest rate.

An SMF report gives the example of a family paying £7,800 for childcare over three years. Under the scheme, their repayments would fall from £50 a week over three years to £14 a week over 11 years. Payments would stop if earnings fell below the threshold for personal allowance, which is now £7,475, and would be written off after 20 years.

Shorthouse, an adviser on childcare to the Conservatives in opposition, said: "Compared with other OECD countries, the financial contribution of both government and parents to childcare is high, which suggests that the costs of delivering childcare in Britain is greater.

"What is striking from the Department for Education's report is the low profitability of childcare settings. This is because demand for childcare is weak and volatile, with providers dependent on a small, localised customer base.

"Coupled with the tight staff-child ratios, which makes expansion expensive, nurseries are just not gaining the revenue needed to build a truly high-quality, universal childcare system. But if we are to reduce child poverty and raise life chances, investing in the early years is essential.

"If government can't spend any more money, it should instead offer parents public loans which will make childcare costs much more manageable and increase funds flowing into the sector."